Two federal courts handed down decisions, both on July 13, about the status of the Financial Oversight and Management Board of Puerto Rico and the nature of proceedings under the Puerto Rico Oversight, Management, and Economic Stability Act, or PROMESA (48 U.S.C. §§ 2161 et. seq.).
Whether the two decisions are in conflict is arguable, and it’s an open question as to whether the decision handed down by the Court of Federal Claims, or COFC, might eventually disrupt Puerto Rico’s court-supervised debt arrangement proceedings.
This week, we reported on In re The Financial Oversight and Management Board for Puerto Rico, 17-3283 (D.P.R. July 13, 2018), where District Laura Taylor Swain, sitting in the District of Puerto Rico, ruled on July 13 that the appointment of members of the Oversight Board did not violate the Appointments Clause of the U.S. Constitution. To read the story, click here.
Also on July 13, Chief Judge Susan G. Braden of the COFC ruled that she had exclusive jurisdiction over claims by bondholders that they are entitled to compensation from the U.S. government because actions taken under PROMESA deprived them of property in violation of the Due Process Clause of the U.S. Constitution. Judge Braden therefore denied the government’s motion to dismiss the bondholders’ lawsuit. In the process, she cast doubt on some of the underpinnings of Judge Swain’s opinion.
Significantly, Judge Braden stayed further proceedings in her court pending “final judgment” in Judge Swain’s case.
If it makes your head swim, you’re not alone. Interpreting the ultimate effect of the two decisions is like trying to predict the outcome of a chess match after the first two moves.
Judge Swain’s Ruling
After the Supreme Court ruled that Puerto Rico was ineligible for chapter 9 municipal bankruptcy, Congress quickly adopted PROMESA. Months later, the Oversight Board, exercising its exclusivity authority, initiated court-supervised debt restructuring proceedings for Puerto Rico and its instrumentalities in the District of Puerto Rico. The Chief Justice tapped District Judge Swain of New York to oversee the PROMESA proceedings in Puerto Rico.
In the case before Judge Swain, bondholders argued that PROMESA violated the Appointments Clause because the Oversight Board was not appointed by the President and confirmed by the Senate.
In her July 13 opinion, Judge Swain denied the bondholders’ motion to dismiss the PROMESA proceedings, concluding that “the Oversight Board is a territorial entity and its members are territorial officers” and therefore not subject to the Appointments Clause.
The Suit in the Court of Federal Claims
Attacking PROMESA, bondholders had opened a different front in the COFC less than a month before the motion to dismiss in Judge Swain’s court.
In the Washington, D.C.-based COFC, the bondholders alleged they had suffered an unconstitutional taking of property because the Oversight Board required the Puerto Rico legislature to pass a law depriving them of collateral for their bonds. In the COFC, the bondholders sought compensation from the government for the property they allegedly lost.
The U.S. government filed a motion to dismiss, contending that Judge Swain had exclusive jurisdiction over the claims raised in the COFC. Also on July 13, Judge Braden denied the motion to dismiss.
Jurisdiction in the COFC
Judge Braden explained that the Tucker Act (28 U.S.C. § 1491) gives the COFC exclusive jurisdiction over claims for “just compensation” under the Takings Clause of the Fifth Amendment. However, the statute provides that Congress may withdraw Tucker Act jurisdiction by showing its “unambiguous intention.”
The government argued that Judge Swain had exclusive jurisdiction because Section 2126(a) of PROMESA gives exclusive jurisdiction to the District of Puerto Rico for any action “arising out of this chapter, in whole or in part.”
Judge Braden disagreed, holding that the COFC has jurisdiction because Section 2126(a) of PROMESA does not demonstrate the required “unambiguous intention.”
No PROMESA Preemption
The government argued that PROMESA preempted the Tucker Act.
Judge Braden rejected the argument, because she found no “comprehensive remedial scheme” in PROMESA to compensate creditors for unconstitutional takings of property.
Significantly Judge Braden held that “the Tucker Act and PROMESA are capable of ‘coexistence,’” because bondholders can “seek adjudication against the United States for ‘just compensation’ in the [COFC] and declaratory relief, if requested, in the [District of Puerto Rico].”
If there is a potential flaw in Judge Braden’s decision, it could be her finding of no “comprehensive remedial scheme” because PROMESA and the Bankruptcy Code are carefully crafted to protect and compensate creditors for their rights in collateral.
Oversight Board Is a Federal Entity
Because the Tucker Act applies to claims against the U.S., the government sought dismissal by arguing that the Oversight Board is an entity of Puerto Rico.
Even though PROMESA provides that the Oversight Board “shall not be considered a department, agency, establishment or instrumentality of the Federal Government,” Judge Braden said that characterizations in federal statutes are not binding on courts when it comes to deciding whether an organization is a government entity.
Judge Braden concluded that PROMESA met the three tests for concluding that the bondholders’ suit is a suit against the government.
In the process, Judge Braden rejected the government’s argument that PROMESA was enacted “pursuant to Congress’ Article IV plenary authority over the territories,” the theory that Judge Swain used in ruling that the Appointments Clause did not apply to the Oversight Board.
Although conceding that Congress has “broad latitude” over territories, Judge Braden said “that authority does not supplant the role of federal courts in protecting fundamental constitutional rights.” [Emphasis in original.]
Judge Braden said that “the Takings Clause claim is alleged against the Oversight Board, as a federal entity.” Therefore, she ruled, “Congress authorized the [COFC] with jurisdiction to adjudicate that claim.”
Takings Suit Is Stayed
At the end of her opinion, Judge Braden took note of two disputes pending before Judge Swain, including the motion to dismiss that Judge Swain denied on July 13. Should the bondholders prevail in those litigations, Judge Braden said that the “appropriate remedy” may call for declaring that the actions by the Oversight Board were “unlawful,” requiring the restoration of the bondholders’ collateral.
Although Judge Braden denied the government’s motion to dismiss for the reasons discussed above, she said that “the interests of justice require that this case be stayed, at least until a decision and final judgment is entered in each of the above-referenced cases” before Judge Swain.
What Does It All Mean?
Superficially at least, the two July 13 opinions seem inconsistent. One court concludes that the Oversight Board is a federal governmental entity, and the other says members of the board are “territorial officers.”
The conclusions may not be inconsistent, however, because it’s conceivable that both are correct. A territorial officer may fit the definition of a governmental officer for the purpose of a Takings Clause suit but not with regard to the applicability of the Appointments Clause.
Appeals will go to different circuits. The Puerto Rico PROMESA decision will be reviewed in the First Circuit, but the COFC decision would go to the Court of Appeals for the Federal Circuit. However, the COFC decision likely is not a final order, meaning there will be no immediate appeal absent leave to appeal.
Consequently, there may be an appeal to the First Circuit but no appeal on the related issue to the Federal Circuit. If there are appeals to both circuits, and if the two circuits’ decisions seem inconsistent, the Supreme Court would be the final arbiter.
Will the differing decisions foster settlement talks or embolden either side? Can Puerto Rico afford to settle with the bondholders? If Puerto Rico and the bondholders want to settle, will other creditors allow them to if it means smaller recoveries for them?
Is litigation ever the best method for resolving a bankruptcy?
If both July 13 decisions stand, the PROMESA proceedings could proceed to an ordinary conclusion, because Judge Braden only denied a motion to dismiss. She did not even hint, one way or the other, at whether bondholders were deprived of property without due process. In other words, the suit in her court could proceed to conclusion, and Judge Braden might decide there was no Taking Clause violation because the bondholders’ constitutional rights were protected under PROMESA.
Or, if Judge Braden finds there was an unconstitutional taking, she might fashion a recovery against the U.S. for bondholders’ losses as a consequence of PROMESA. A valid claim against the U.S. government doesn’t necessarily mean that the PROMESA court cannot approve and implement a debt arrangement.
Also recall how Judge Braden said that the suit in her court and the PROMESA proceedings “are capable of ‘coexistence,’” because bondholders can “seek adjudication against the United States for ‘just compensation’ in the [COFC] and declaratory relief, if requested, in the [District of Puerto Rico].” Likely as not, bondholders will raise Takings Clause claims in opposition to any arrangement proposed by Puerto Rico. Therefore, Judge Swain might make the declaratory judgment to which Judge Braden referred.
Reversal of Judge Swain’s decision is another matter. If there was an Appointments Clause violation, the PROMESA proceedings could unravel, allowing bondholders to push Puerto Rico to the wall unless Congress fashions another statute.
It’s a mess. That’s all there is to say. That’s what happens when two courts share jurisdiction over one pot of limited resources.